Daily market review March 5th, 2024 ( Mid & small cap outperform Cap-weighted index, Bitcoin reached All time high, review of interesting macro charts )
Broad market overview
Market has been drifting higher since last week, had a minor melt up last Friday, but suddenly had a second thought and got spooked on Monday late afternoon ( US Eastern time ) and Tuesday.
Most of the indices display a look above and fail pattern ( fail breakup ), will this foreshadow a larger pullback ? This depends largely on the CPI print by March 12 and the NFP print on March 8th, before the all important fed meeting, on march 20 which comes with new dot plot projection. CPI print on March 12 will determine the dot plot projection and Fed communication tone.
NDX had the worst selloff at around (-1.8%), follow by semis (-1.5% ) and SPX , DJIA respectively at -1%.
Equal-weighted performed better than cap weighted counterpart.
Mid and small cap perform the best on this sell off day, managed to closed at -0.32% , 0.44% respectively.
SPX
SPX has not yet pull back to the 20D MA, let alone 50D MA, this strong persistent trend is something to behold, it will come under test in the coming CPI print.
NDX
NDX has pullback to 20D MA, will the retracement have any strength in further downside follow through ? we will monitor closely which MA will be tested and breached in the upcoming days ( open minded to both scenario of bounce&rally, cutting through deeper MA like hot knife through butter )
Let’s look through some interesting flow, volume and macro charts.
Global manufacturing PMI and new order
Globally, Manufacturing PMI is showing initial signs of bouncing off the consolidated lows and is approaching 50 level, further confirming that the recovery of real world economy cycle is on solid footing. And of course financial market has price in this ahead and has been rallying. Manufacturing PMI bouncing to 50’s does also mean we are in the 4th inning in this asset market rally phase.
Floating rate debt %
A bit of a retrospective perspective and explanation for 2 perplexing question to every investors’ mind,
1) Why the Fed rate hike in much of Q4 2022 and 2023 did not bring about the apocalyptic collapse in S&P 500 ?
2) Why is there such a large divergence in Russell 2000 and S&P500 performance ( when usually small cap lead the market recovery in the past )
Because 27% of S&P 500 has floating rate debt ( which mean 70% has fix rate debt and is spared from fed rate hike angst
60% of Russell 2000 has floating rate debt and is facing the full bore brunt of Fed aggresive rate hike
S&P 500 company Pristine balance sheet (extremely low debt)
S&P 500 companies net debt/EBITDA
S&P500 total debt to Total asset
Still remember the last year media articles on how the higher for longer rate will augur in the debt default, debt repayment, …and therefore bring about much lower Us market index figures ? ( S&P 500 to 3200 , 3000 etc. )
Well contrary to those argument, S&P 500 has some of the best Balance sheet situation ( excellent debt to EBITDA, Asset-debt ratio ), rate hike will not affect them ( and as mentioned above they are getting fix rate instead of floating rate )
Passive ETF vs Actively managed funds
Passive ETF has exceeded Mutual fund for the first time ( Thanks to Jack bogle marketing mantra, ETF industry clout and their lobbying in changing the Tax & Regulation in favour of ETF industries ). And it will continue for a long time , just look at ETF popularities among young investors, and how often they in are repeating the Jack bogle ( and Warren Buffet ) ETF mantra .
How long will the US outperformance and market cap growth continues ?
US outperformance has been notable, how long will it last ? long into the future for 2 fundamental reasons,
1) US has the cutting edge leadership in AI and robotics company ( and USD reserve status, means global investment flow is directed at USD asset )
USA has the best technology company every household and company in the world is using US software. Every machine is powered by components from US brand.
And most importantly, chatbot with Generative AI technologies are personal Robot assistant with “Rocket-fuelled” productivity boost.
2) Popularity of ETF investment
virtually every US investors and global investors buy ETF that tracks US market. Even if they buy Global market ETF, it still has significant share allocated to US equity market.
Is US company valuation too high?
It’s high by historical standards, but no where near as high as Pre-Covid peak and dotcom bubble level.
Is investors getting FOMO and ignoring risk and becoming complacent ?
Yes given the downward skew in index put call, there are is some evidence of that. But it’s nowhere near as extreme as 1997.
Is investment managers ( managing institutional fund ) becoming complacent ?
Investing managers are net short 220K ES (SPX futures ) contract. As the saying gies a hedge port doesn’t boil.
( conjecture : it’s possible CPI and fed meeting will bring some angst to the market, but it’s been anticipated and hedge, therefore the sell off/pullback might not be as significant as everyone hope to be )
Bitcoin
Good news, Bitcoin has climbed and broke above ATH. Bad news, Bitcoin selloff by more than 10% to retest 60K level after reaching ATH.
Inflow to crypto market
There has been quite a significant inflow to Crypto asset and Spot bitcoin ETF, is this the FOMO buy before getting trap at high and flush out subsequently ? time will tell.
In my own humble view, market may retrace in the near term in lock step with equity market performance should there be some anxiety in CPI and Fed communication tone. But given enough time , bitcoin will climb and stay above ATH.
As always, we will continue to monitor the charts, assess the bullish/bearish evidence day-by-day to make appropriate capital allocation and investment decisions.
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